Making sense of Capital Gains Tax and your Property 2017 – 2018

Capital Gains Tax (CGT) is a complex area to dip into, so here I’ve tried to give a brief
explanation for the normal situations that many of us face, broken down into the following
sections:

When you don’t have to pay Capital Gains Tax
When you are eligible to pay Capital Gains Tax
How much you will have to pay?
What if you have a second residential property?
Letting relief and Capital Gains Tax
Capital Gains Tax on inherited homes
Capital Gains Tax on gifted homes
Capital Gains Tax Liabilities for UK Non-Residents
Capital Gains Tax on investments
Claiming Entrepreneurs’ Relief against Capital Gains Tax

As always, our advice is to seek clarification on any issues from your Financial Adviser.

When you don’t have to pay Capital Gains Tax.

If you are selling your own home (main place of residence) then the good news is, that it’s
very unlikely that you will need to pay CGT as you will benefit from 'Private Residence Relief'.
If however you are selling a home that you currently rent out, or you are selling a second
home, then CGT may become applicable. That said, there are a number of ways you may be
able to reduce your CGT bill through letting relief or by nominating which of your homes you
wish to be viewed as tax-free.

When you are eligible to pay Capital Gains Tax.

Although not an exclusive list, below are the most common scenarios that activate CGT on a
property sale:

• It is not your main place of residence
• You have developed your home. For example you may have converted part of it into flats
• You have sold part of your garden, where your total plot, including the area you are selling,
is more than half a hectare (1.2 acres)
• You exclusively make use of part of your home for business
• You let out all or part of your home. This doesn’t include having a lodger. To count someone
as a lodger you need to be living in the property too, or they are classed as a tenant
• You moved out of your property 18 months ago
• You bought the property for the purpose of renovating it and selling it on

How much you will have to pay?

The CGT rates for 2017 – 2018 state that when you sell a property, you are allowed to keep a
proportion of the profits tax-free. This is called your Capital Gains Tax Allowance.
In the 2017 – 2018 tax year, you can make a profit of £11,300 before you have to pay CGT.

With basic rate taxpayers paying 18% CGT on property sales over this profit allowance.
Whilst higher-rate and additional-rate taxpayers will have to pay 28%.

What if you have a second residential property?

As long as you haven’t bought your second home with the sole intention of selling it in order
to make a profit, and you use it, then you can nominate which of your two homes will be tax-
free. Just make sure you make the nomination before the two-year deadline from the time you
acquire your new home.

It’s worth noting that the property you nominate doesn’t have to be the one where you live
most of the time. So it makes sense to pick the one you expect to make the largest gain on
when you come to sell.

Civil partners and married couples can only nominate one main home between them, but
unmarried couples can each nominate different homes.

Letting relief and Capital Gains Tax.

Providing the property has been your main home at some point, and you have let out either
all or a part of your home, then you can claim tax relief in the form of Private Residence Relief
for the time it was your main residence, along with the last 18 months of ownership. You can
even claim if you weren't living in the property during those 18 months.

You may also be able to further reduce your capital gains tax bill by claiming Letting Relief.
However, you can't claim Private Residence Relief and Letting Relief for the same period.
The amount of letting relief you can claim will be the lowest of these three:

• £40,000
• The total you receive from the letting proportion of the home
• The total Private Residence Relief you get

Capital Gains Tax on inherited homes.

When someone leaves you their home in their will, you inherit the property at the market
value at the time of their death.

As there is no CGT payable on death, the value of the home is included in the estate and
inheritance tax may be payable instead.

If you sell the property without nominating it as your own home, you won’t be able to claim
Private Residence Relief, so there will be CGT to pay if the value has increase between the
date of death and the date of the sale.

Capital Gains Tax on gifted homes.

If the property is gifted to you during the owner’s lifetime (while they are still living there), this
is termed as a ‘gift with reservation’ and essentially means it still counts for inheritance tax
when the gift giver passes away.

So there will be CGT to pay when you sell the home if the value has increase between the
date of the gift and the date of the sale.

Capital Gains Tax Liabilities for UK Non-Residents.

Unfortunately, being an expat or non-resident in the UK no longer avoids CGT duties. Since
April 2015 British expats and non-residents are required to report the sale or disposal of
properties to HMRC. With the CGT being payable on gains made after 5 April 2015.

Please be aware that you must inform HMRC within 30 days after the ownership transfer
date, even if there is zero tax to pay.

Capital Gains Tax on investments.

Making regular investments is often seen as the smartest way to get into the stock market.
However it can present some challenges if you decide to partially sell your investments. If you
are completely liquidating your portfolio, then the CGT is straightforward – being the total
amount paid into the fund deducted from the proceeds of the final sale gives you the size of
your capital gain. With anything exceeding the £11,100 CGT limit becoming liable at your tax
rate.

It’s when you only liquidate part of your investments that things can become complicated. As
a rule of thumb, if you have bought units at a variety of prices over a period of time, then you
will need to work out the average price per share. You can then calculate your investment
against your gain. Again your financial adviser can help you with this.

Liquidating funds often allows investors to ‘Bed and ISA’. Where investments that are held
outside an ISA are sold and then the same investments are bought back within an ISA
avoiding CGT in the future.

Claiming Entrepreneurs’ Relief against Capital Gains Tax.

Business owners who are selling all or part of their business can claim Entrepreneurs’ Relief
(ER) on the sale and reduce their tax liability to 10% on all qualifying gains.

The main qualifications for ER, are if you dispose of any of the following:

• All or part of your business, including the business’s assets, once it has been closed
– either as a sole trader or business partner
• Shares or securities in a company where you have at least 5% of shares and voting
rights
• Shares you got through an Enterprise Management Incentive (EMI) scheme after 5
April 2013
• Assets you lent to your business or personal company
Once again, this is not an exclusive list and further information can be found here

If you have any questions regarding Capital Gains Tax

As always, if you are in any doubts as to your current situation, or potential CGT obligations,
then you should consult a financial adviser. You are welcome to contact us where we
will be happy to help answer any questions you may have.

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